Written evidence submitted by the Scottish Government (DIS0026)

Scottish Government’s response to the Scottish Affairs Committee Inquiry – Naval Shipbuilding

Introduction

The Scottish Government welcomes the opportunity to provide evidence to the Scottish Affairs Committee inquiry on naval shipbuilding in Scotland, as part of the wider inquiry series into Defence in Scotland. 

Previously, in November 2021, the Scottish Government provided written evidence to the inquiry into the military personnel and military estate landscape in Scotland, whilst in March 2022, the Cabinet Secretary for Justice and Veterans, Keith Brown addressed the Committee making a key request for a greater engagement between UK Government and the Scottish Government, urging the UK Government to outline how defence capability will be achieved with cuts to personnel numbers, and calling for increased dialogue over defence industry spending – vital for Scottish economy, supporting jobs across the country.  

Naval Shipbuilding in Scotland

Naval Shipbuilding falls within the wider manufacturing economy and aligns with Scottish Government’s ambition for Scotland to become the home of manufacturing innovation, and to be seen as an inventor and producer - not just a consumer of goods - innovative, thriving and international looking.

The sector supports thousands of highly skilled jobs and our shipyards at Govan, Scotstoun and Rosyth have proven time and again that they are able to deliver contracts of quality, supporting not only the security of the whole of the UK but also generating prosperity UK-wide.

In 2019, shipbuilding generated £408 million in GVA (a 45% increase from 2018), accounting for 0.3% of the overall Scottish economy and 8% of the marine economy GVA, supporting c.6300 highly skilled jobs. Scottish shipbuilding accounted for around 23% of turnover and 19% of GVA of total UK output of the industry in 2019. This is a higher proportion than Scotland's contribution to the whole of manufacturing, where Scotland accounted for around 6.5% of turnover and 8% of GVA of total UK manufacturing in 2019[1].

Naval shipbuilding is a part of the wider defence industries sector and the industry trade body ADS recently estimated that in Scotland alone, defence industries have a turnover of £1.9 billion, GVA £0.8 billion; 10,000 direct employees and support 350 apprentices a year [2] – the skilled workers of the future.

UK National Strategy for Shipbuilding Refresh (NSbS)

The Scottish Government welcomes the publication of the NSbS, which recognises the future opportunities for both naval and commercial shipbuilding and we are supportive to the overall direction and ambition of the strategy.

Scotland’s significant shipbuilding capabilities provide nearly all of the current Royal Navy surface fleet and make up a not insubstantial portion of the supply chain of the UK submarine programme. Taken in the round, shipbuilding makes a substantial contribution towards both the Scottish and UK economies. The Scottish Government, therefore, is keen to see the benefits to Scotland of the NSbS maximised.

Furthermore, the recent Russian invasion of Ukraine has underlined the importance of sovereign capability and self-sufficiency in defence shipbuilding as we enter a new global security environment.

Governance

We recognise that Defence is fully reserved to the UK Government but decisions made at the UK level have far reaching implications for Scottish communities and industry, which we have an active role in supporting.

The Scottish Government has a clear locus in decisions made by the UK Government, and it is right that the Scottish Government is consulted fully on all related defence matters that impact on Scotland.

Real and meaningful engagement from the UK Government is key to ensure that we can maximise the benefits to the Scottish industry - lack of engagement leads to missed opportunities, frustration for stakeholders and unnecessary tension between governments.  Particularly, given the strategic importance of Scotland’s significant shipbuilding capabilities and the sector’s substantial contributions towards the Scottish and UK economies.

Scottish Ministers welcome both engagement and consultation from the National Shipbuilding Office (NSO) during the development of the refreshed strategy and the recent invitation to participate in the National Shipbuilding Strategy Board. The chances of success are only increased for all of us, if that participation is both meaningful and collaborative and as we all look forward to the implementation of the strategy.

•                  On governance, Scottish Ministers would continue to expect an active role in the implementation of the strategy through their policy officials as well as the enterprise and skills agencies.
•                  We would also ask that the Shipbuilding Enterprise for Growth (SEG) interact and align itself with existing clusters and industry forums, and that the Scottish industry always has a strong voice within it.

Procurement

The MoD Command Paper 2021, indicates total spend on defence industries in Scotland is £2.1bn, supporting 12,400 direct jobs within the industry, with shipbuilding making up c.£1bn and the largest category of individual spend. This is reflected through the contracts secured by BAE Systems on the Clyde and Babcock at Rosyth.

In Govan, BAE Systems is working to deliver eight Type 26 warships for the Royal Navy, while Babcock in Rosyth are constructing five Type 31 frigates.

Our shipyards benefit from these programmes that are providing them with work over the longer-term, thus supporting thousands of jobs in the local communities.

The 30-year shipbuilding pipeline set out in the NSbS will hopefully bring much desired long-term visibility and confidence to the shipbuilding industry, however, the Scottish Government acknowledges that the NSbS falls short of committing to building UK ships in UK shipyards.

We are keen to ensure Scotland and our shipyards benefit economically from major naval vessel procurements. Not least because it means ship-derived intellectual property remains on these shores and we benefit from the export potential – BAEs export success with the Type 26 design to Australia and Canada is a good example of this.

We would also be keen to avoid a scenario where UK yards are bidding for work, receive the award and then sub-contract that work overseas. There has been some public discussion of a risk of this scenario being realised with the upcoming Fleet Solid Support (FSS) vessel procurement. Scottish Ministers recognise that shipbuilding capacity and the resilience of that capacity is an ongoing issue, but it is felt that this would be a poor reflection on what NSbS is trying to achieve.

Regarding wider procurement, what remains an essential instrument in securing shipbuilding, jobs and infrastructure in Scotland is an approach utilising the exemption from the requirement for full competitive tender under regulation 6(3) of the Defence and Security Public Contracts Regulations (DSPCR) 2011 (previously undertaken under Article 346 of the Treaty on the Function of the European Union).

Notably, as in the case of the FSS procurement, which was initially opened to international bidders as the vessels were classified as ‘non-warships’ back in 2017. However, following criticism the UK Government suspended the competition, and in 2020 re-classified the vessels as ‘warships’ to allow them to be effectively designed and built in the UK, re-starting the competition last year.

It is extremely important to have a strong SME base so that we have sufficient capacity and skills to maximise on opportunities. In Scotland, our recently published National Strategy for Economic Transformation outlines our ambition to make Scotland one of the best places in the world to do business, which includes supporting and listening to SMEs and working together to stimulate innovation, improve productivity and increase investment in Scottish manufacturing.

MoD expenditure with SMEs in UK was under £1bn in 2020/21, with SMEs in South of England receiving the most expenditure - 54% of the total SME spend.

In contrast, Scotland accounts for a small proportion of SME spend, ranking ninth out of 12 areas, which is not in line with the total MoD expenditure in Scotland, which receives the fourth highest proportion.

Understandably, as Scotland is a base for the Shipbuilding and Repairing industry, it would account for the high level of the overall spending, however improvements could be made to streamline and reduce the administrative burden of MoD procurements to support more SMEs to bid in to work.

Our own engagement with the industry in Scotland suggests that SMEs have struggled to interact meaningfully with UK Government structures in the past. We would suggest that this is an early priority for the work of the NSO and we would hope that the new governance framework being stood up to support the strategy delivery will also address what we understand is a historical and enduring issue.

We also agree with the spirit around the commitment to disaggregating larger contracts to help SMEs, however, given the procurement for naval vessels is largely dependent on primes such as BAE and Babcock, then perhaps both they and the MoD need to jointly explore what more can be done to maximise the opportunities for smaller firms.

Finally, the Scottish Government welcomes the commitment around the Social Value Model and notes the increase in the weighting from the standard 10% applied under Public Contract Regulations (PCR) and Defence and Security Public Contract Regulations (DSPCR) to 20% for MoD shipbuilding competitions.

However, we are keen to see how the model will work in practice as we would hope it would support greater economic activity being undertaken not only in Scotland but UK-wide and we would welcome the UK Government publishing a review on its impact.

Shipbuilding Skills Taskforce

The Scottish Government recognises that NSbS commits to launching the UK Shipbuilding Taskforce by this summer, to work jointly with the devolved administrations to ensure the industry and the supply chain in all parts of the UK can access the skills they need.

The Scottish Government acknowledges that this initiative comes at a crucial time for the sector UK-wide. Attracting and retaining a diverse pipeline of skilled workers, along with addressing the skills shortages, particularly those related to new and emerging technologies and zero-emissions shipping, will play a key role in ensuring that naval shipbuilding will continue to flourish. 

We welcome the recognition that skills is a devolved competency and that Skills Development Scotland (SDS) were consulted during the drafting of the strategy.  SDS are also participating in work around skills for our place-based Clyde Mission as well as supporting various Scottish-based companies’ initiatives. All these initiatives form solid foundations that could feed into the ongoing activity of the skills taskforce.

•                  Scottish Ministers would seek assurances that the Scottish industry will be well represented in the taskforce, given that the vast majority of the sector resides in Scotland.
•                  We would expect that consideration is given to existing and planned initiatives around the country, particularly in skills, to ensure that any new projects complement and align with existing work being undertaken in Scotland such as the Scottish Government’s Clyde Mission Initiative.

Exports

The Scottish Government welcomes the creation of further export opportunities through the Maritime Capability Campaign Office (MCCO).

Our position on exports is set out in our Trade Vision document and within that we have an expectation that appropriate safeguards must be in place in respect of human rights and international laws.

• We would ask that the UK Government abide by a similar philosophy with regard to defence exports.

Net Zero and R&D

It is encouraging that the strategy recognises the opportunities for the shipbuilding and maritime sectors associated with the transition to Net Zero and is committed to accelerating decarbonisation of the industry, innovation and adoption of green maritime technology. This is broadly compatible with the Scottish Government’s own ambition to become a Net Zero society by 2045.

Scotland possesses significant capabilities and structures to support future R&D activity including the National Manufacturing Institute Scotland; the Lightweight Manufacturing Institute Scotland; the Advanced Forming Research Centre and the Michelin Scotland Innovation Parc. These institutes offer the UK defence sector indigenous access to the latest developments in material science, manufacturing processes and engineering advancements which form the cornerstone of a strong conventional military force fit for the modern age and could play a key role in supporting the future R&D in the areas of interest of NSbS.

For example, the University of Strathclyde is involved in five clean maritime projects which won a total of £1.7m of UK Government funding, including a project to support the transition to zero-carbon fuels for the Shetland’s Island’s maritime industry; first green submarine, and green hydrogen.

Naval Shipbuilding can play a very significant role in our transition to net zero, as one of the most innovative sectors with high ambitions for progressing in low carbon technologies. The capabilities in technology, engineering and manufacturing of companies currently focused on the market in Scotland are world-leading and there is a clear focus and recognition on low carbon opportunities in the longer term.

Scottish Ministers welcome the commitments around transition to alternative power and fuel sources for naval vessels and auxiliaries. Again, acknowledging that defence is a reserved area, Scottish Ministers agree that the UK should be a leader in the technological progression, selection and rollout of alternative fuels in naval fleets, but that this activity must be harmonised with wider NATO partners in the interests of commonality.  

Conclusion

Scotland makes a considerable contribution to the UK's defence, based on unique and distinct capabilities - our defence industry builds world-leading ships and hi-tech equipment to support British forces across the World.

We maintain that the Scottish Government should be actively involved in the implementation of the NsbS and its associated initiatives.

The Scottish Government stands ready to share information with the UK Government and facilitate discussions with our stakeholders to ensure that decisions are informed by facts. It is our view that decisions cannot be undertaken in isolation from an assessment of their long-term impact, either in terms of lost skills, economic impact or capabilities.  We call on the UK Government to work with us to help best serve the future defence needs in Scotland.

Industrial Sectors and Projects Unit

Scottish Government

May 2022